Five ways to avoid cash-flow problems
The maxim ‘revenue is vanity, cash is reality’ is easy to forget in the whirlwind life of a business owner – especially when things are going well. Unfortunately running out of cash is the way hundreds of successful businesses die every year.
We have highlighted five of the best strategies for improving your cash-flow position.
- You have a choice regarding who you choose to trade with!
- We’ve seen many business suffer from doing business with high-revenue, C-grade clients (Can’t deal with) who were detrimental to cash flow because they failed to pay on time.
- It’s too common for business owners to choose to work with just any customer, accepting unfavourable credit terms in return for winning the business.
- We coach business owners to overcome fear by understanding that the portion of the market they need to capture is usually very small. They must calculate the percentage of their target market that they need as customers to hit their five-year revenue targets. It’s generally less than 2%… In other words, you don’t have to work with everyone!
- This new belief system empowers business owners to have the courage to stand up to, and better negotiate, more favourable terms with their customers – or to walk away, if necessary.
- Make sure you are clear who your ideal A-grade client is. That definition would include a statement about budget and payment terms.
- Actively targeting A Grades with your marketing forces you to make sure your marketing is far more targeted and to better understand your target market.
- Avoid doing business with C&D Grades whenever possible.
- Make sure the members of your sales team understand who they should be targeting and the importance of winning good quality leads.
- Sack your D-grade customers – ie stop trading with them. The best way to enforce this is to put up your prices
- Not all customers are equal. Grade your customers A, B, C or D from best to worst and then get rid of all the D Graders
It allows you to spot potential cash shortages before they happen, allowing you to plan for those shortfalls in advance, thereby avoiding the stress and panic of cash suddenly running out
- The mistake of not forecasting possible shortfalls catches too many businesses out – even long-established, multi-million rand companies!
- It’s tragic that these disastrous cash situations could have been avoided with a bit of forward planning
- Do it yourself or seek help from your bookkeeper or accountant
- It may be a daunting exercise at first, but once the system is created it can be updated every month or quarter with minimum time and effort
- Review regularly with your board, management team or financial director and ask them to help you achieve the stated cash-flow target
- Your cash flow forecast system should be built to a professional standard and should be reviewed regularly so that potential cash flow problems don’t fly under the radar
- Low-value tasks such as invoicing, reporting and credit control eat up valuable time. Senior team members should not be wasted here
- Systemisation of this process leads to optimisation of your working capital
- It’s relatively easy and cost effective to implement
- Potential buyers or investors seek companies with ironclad control of these processes. It’s a ‘must have’ otherwise they will walk away
- Automate as much of your billing process as possible
- Break down the process into a clear step-by-step manual that anyone could follow
- Consider outsourcing to an external contractor. Business owners are often surprised by how little it costs and how much time it saves
- Systemise your billing process or outsource completely. Your billing process is the perfect example of an area of your business that is ripe for systemisation. Done properly this results in better performance, cost savings and better scalability
- Several clients have freed up hundreds of thousands of rand (typically R3-m+ businesses). They would have limited or even zero cash flow without invoice factoring
- You sacrifice margin but it’s a great solution for freeing up cash
- You sell your invoices to an invoice finance provider. They pay you immediately and collect the invoice themselves later (taking a percentage fee)
- Make sure you vet your providers properly and don’t use anyone who is likely to treat your customers unfairly
- Incentivise early payment – offer a small discount in return for early or upfront payment. Very effective where you have long projects with consequent long payment cycles
- Consider paying to get your cash early. It’s common practise for companies to give up a small amount of their margin in order to free up cash early. Be open to this idea as it often makes good financial sense
- Many businesses pride themselves on their customer-service standards and do a wonderful job at it
- However sometimes this is achieved only due to over servicing customers
- It’s very common in service industries, especially among creatives who often go out of their way to prove their creative flair or design expertise, but with no eye on the clock
- In service companies the biggest overhead is wages so make sure you track the time each employee spends on what.
- I’ve seen several businesses exceed budgeted-time allocations by 50% or more because they weren’t tracking the time they spent on each project!
- Calculate the impact over servicing your customers has on your net profit margin. As a crude example, imagine a R1-m turnover business with a R500-m wage bill, but over servicing by 25% on average. A business that should be investing R400-m in wages is actually spending an extra 25% – ie R100-k extra for the same revenue. That’s R100-k that could have been added to net profit or 25% more new clients that could have been taken on.
- Realise that your customer can’t always be your priority. Sometimes staying afloat is more important than going the extra mile for every customer. Over servicing your customers and running projects over schedule means you’re sacrificing your margins…